Jonathan Shapiro

The conventional wisdom that has underpinned the Australian dream of home-ownership could be flawed, according to a research paper published by the Reserve Bank of Australia which seeks to answer the age old question: is it cheaper to own or to rent?

The RBA’s conclusion is that house prices would have to continue to rise at the same rate as they had for the past six decades for owners to be as well off as renters.

“If house price growth were to be slower than the historical average, as some forecasters predict, then the average home buyer would be financially better off renting,” the paper says.

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The RBA says this finding allays concerns about a housing bubble, because investors are assuming house price growth will maintain the pace of the last sixty years.

But if the pace drops, the renters would be the real winners.

The RBA analysed a range of costs involved in owning a house but not applicable to renters, such as council rates, interest rates and the purchase price.

It said that while there had been countless comparisons, its study was unique because it focused on Australia and used a larger and improved data set.

There were limitations in the paper, the RBA said, noting the it focused on owner-occupied purchases. Investors in housing may be better off because of tax reasons.

The RBA also noted non-financial benefits such as security of tenure, pride of ownership and freedom to renovate.

It calculated that the annual rate at which the real (inflation-adjusted) price of a house must rise for an owner to keep pace with a renter financially was just below 2.5 per cent.

“If this rate of appreciation is expected to continue then our estimates suggest that houses are fairly valued,” the paper said.

Predicting future house price growth was difficult, the RBA said. But the central bank made it clear that if house price growth slowed, renters would be better off.

“Many observers have suggested that future house price growth is likely to be somewhat less than this historic average. In that case, at current prices, rents, interest rates and so on, the average household is probably financially better off renting than buying.”

The paper said while owning a house tended to be a more attractive option over a longer period, the “size of the effect was not obvious”.

Assuming real house prices increased at the historical expected real rate of 2.4 per cent, buying beat renting if the owner held for more than eight years.

However if the expected real rate of 1.7 per cent experienced over the past 10 years was used, owning only beat renting over a period longer than 30 years.

“Consistent with conventional wisdom, households expecting to move again in a few years’ time are better off renting, unless they believe they can sell the property for an unusually large capital gain,” the paper said.

Warning shot

Professor Nigel Stapledon of the University of NSW said he believed the paper was designed as a caution to investors and to encourage them to “think in terms of what is plausible in terms of house price growth in the future”

Stapledon was widely cited in the RBA research. He said the paper was “tentatively forward looking,” which was unusual for the central bank.

“The bottom line is an expression of caution going forward,” he said.

“To really justify jumping into the housing market, you really want to be assuming you are getting similar house price gains.”

“The underlying message is there has been a lot of capital gain, but be careful, because they [gains] are far less certain in the future.”

Stapledon also cautioned against buying for a short term gain. If buyers weren’t confident about hitting the inflation adjusted 2.4 per cent real growth, “then renting may be a better option”, he said.

Stapledon, who has conducted extensive studies on Australian property prices, said that house price gains over the last two decades were largely explained by falling mortgage rates.

“From the mid-90s the big story has been falling rates but that’s not going to be a factor in the next 20 years,” he said.

“So you need something happening on the rental side for prices to keep moving upwards and that will constrain house prices rising going forward.”